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08/01/2010

Unionism and Economic Recovery—Posner

A frequent and I think sound criticism of the Obama Administration’s economic policy is that it supports programs that promote economic recovery from the severe recession that began in December 2007 and programs that retard that recovery, thus sending a mixed signal that by unsettling the business environment retards recovery. This mixed message is no surprise, however, because a President is a politician. Has there ever been a President who consistently pursued sound economic theory? Criticism of politicians must be tempered by recognition of political reality.

You don’t have to be a conservative to think it a bad idea to promote unionism in an economy struggling to climb out of a deep economic hole; you can be a Keynesian. A principal goal of unions of course is to raise wages, though in doing so it causes employment to fall by raising the cost of labor relative to the cost of capital. Keynes emphasized (though the point was not original with him) that workers strongly resist cuts in their nominal wages, where “nominal” means the dollar amount of the wages and is contrasted with “real,” which means the purchasing power of the wage. In an economic downturn, an employer who thinks it infeasible to reduce the nominal wages of his employees will have to lay off workers so that his costs of production are not excessive in relation to the diminished demand for his product. Therefore the higher the nominal wages of employees, the more unemployment will be generated by an economic downturn. Keynes thought moderate inflation should be part of a strategy of recovery from an economic downturn, because nominal wages tend to be sticky on the upside as well as on the downside (though less so), and so the employer’s real wage bill would fall in an inflation, though only initially—until the workers caught on to the fall in the purchasing power of their wages and demanded a raise. (This theory of “profit inflation” is no longer accepted by most economists.)

Against all this it might be argued that if employers cut wages rather than laying off workers, the reduction in wages would reduce the amount of money that the workers could spend on consumption; and economic recovery depends on increased spending on consumption (plus investment). But the stickiness of wages, which makes employers prefer layoffs (with the result in the Great Depression, which involved severe deflation, that many workers who retained their jobs experienced a substantial increase in their real wage), is not primarily a result of unionism, or even of worker pressures. Employers don’t like to make steep across-the-board wage reductions in an economic downturn, because the reductions frighten and distract the workers. Layoffs, in contrast, enable reductions in overhead as well as in wages and concentrate unhappiness on former workers (those who are laid off), whereas an across the board wage reduction demoralizes current workers.

Collective bargaining agreements, which are contracts between a union and an employer, usually forbid the employer to reduce wages during the contract’s term (usually three years). But the main reason why unions make it more difficult to recover from a recession or depression is that by raising an employer’s labor costs they cause the employer to lay off more workers in an economic downturn than if those costs were lower. Think of how the United Auto Workers had swollen the labor costs of the Detroit automakers, so that if the government had not stepped in and bailed out General Motors and Chrysler in the spring of 2009 the loss of employment as a result of the economic downturn would have been catastrophic. It is important to realize, moreover, that higher wages are often not the major source of higher labor costs in unionized firms. Benefits (such as health insurance) are very important—critically so in the collapse of GM and Chysler. And often the major source of higher labor costs in unionized firms is union-negotiated limitations on the employer’s control over his labor force: the employer’s freedom to assign tasks, to discipline unsatisfactory workers, and to determine the order of layoffs. Unions bureaucratize labor relations.

Almost at the bottom of the economic plunge—July 2009—the federal minimum wage rose, pursuant to legislation passed by the Democratic-controlled Congress in 2007, to $7.25 an hour. That is just the sort of thing one doesn’t want to happen in a recession. Unions strongly support the minimum wage in order to reduce competition from nonunion workers, but raising the wage retards recovery by increasing sellers’ labor costs.

Unions are weak in the private sector; only about 7 percent of private workers are unionized. But unions are powerful in the public sector—about 30 percent of public employees are unionized—and have contributed to the high wages of such employees. By swelling the labor costs of cities and states, these high wages have forced them to raise taxes and cut benefits in the midst of the most severe economic downturn since the Great Depression.

Even in the private sector, though unions are weak, employers are concerned that the pro-union policies of the Obama Administration will result in greater unionization and hence higher labor costs. This concern is a source of uncertainty, which slows economic activity. Under uncertainty consumers increase their savings (much of which may not get invested productively, at least without a considerable lag) and producers increase their cash balances.

The Administration is not uniformly pro-union. It rightly cares more about education than about unionism, and as a result has clashed with the teachers’ unions; this is one of the Administration’s most laudable endeavors. It has not pushed hard for (though it supports) enactment of the Employee Free Choice Act, which by abolishing the secret ballot in elections for collective bargaining representative and instituting compulsory arbitration of union-management disputes would significantly shift the balance of power from management to labor. It did condition the bailout of the Detroit automakers on preserving substantial, and completely unjustified, union benefits. The overall terms of the bailout weakened the union, but not as much as if the bankruptcy of the automakers had been allowed to proceed without government intervention.

The Administration has, however, under union pressure dragged on signing free-trade agreements that have been negotiated with South Korea and other countries. This would not retard our economic recovery if the net effect were to increase our exports relative to our imports, for exports increase domestic production and hence employment and imports tend to reduce it. But because of retaliation by foreign countries that want to increase their own exports and reduce imports, the effect of the Administration’s foot dragging is simply to reduce the efficiency of the U.S. economy. Also allegedly under union pressure, the Administration delayed suspending (as it is empowered to do in an emergency) the Jones Act, which protects the U.S. maritime industry from foreign competition, to enable foreign vessels to assist in combating the oil leak in the Gulf of Mexico.

Worse, the Administration has required that all projects funded by the $787 (now $862) billion stimulus enacted in February 2009 comply with the Davis-Bacon Act, which requires payment of union wages. Recently the President signed an executive order requesting all federal agencies to consider requiring all federal construction contractors to sign labor agreements. And he has said silly things like “labor is not part of the problem.Labor is part of the solution.” These are just words, but they worry business by creating the impression that the President is hostile to it, and they increase the uncertainty of an already uncertain business environment. The pro-union policies of the Roosevelt Administration, notably the National Labor Relations Act (the Wagner Act), are generally believed to have made the Great Depression worse than it would have been without those policies. The Obama Administration’s pro-union policies will in all likelihood worsen our current economic situation.

Comments

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There is little evidence that support for unions alone, has a catastrophic effect on the economy.

However, support for unions is indicative of an overall drive towards socialist policies which taken all together demonstrably and severely cripple the overall correlation between personal productivity and personal reward. With decreased incentives to produce, overall production falls, and the economy, wealth and once enviable prosperity of America will simply go down the toilet.

America discovers socialism and central planning. That ought to have the rest of the world laughing…

Unions preserved capitalism in America. The alternative was either the union movement or far-left demagogues like Huey Long, Charles Coughlin, the IWW, Communism and anarchism. Even union leaders in America os moderates compared to the Red Diaper Babies leading the European labor movement. The union movement was responsible for creating the American middle class by securing better pay & benefits for its members. This also helped furthering American education & the economy because the workers were able to afford to send their kids to good schools to educate themselves so they could avoid the dirty jobs their parents had to do. That was something that UMW leader John L. Lewis openly boasted about.
He also said "The organized workers of America, free in their industrial life, conscious partners in production, secure in their homes and enjoying a decent standard of living, will prove the finest bulwark against the intrusion of alien doctrines of government."

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Unions used to have power. Unfortunately companies have been able to break unions strength by sending jobs to Third World countries. Unions have lost their way, allowing themselves to be a cog in the leftist statist machine running this country into the ground. If union leaders got back to representing American workers interests instead of being good little leftists, maybe this country would be better off.
If union leaders like Andy (no right to strike) Stern and the SEIU are the best the movement can come up with then the movement as well as the American working class & society is in trouble.
Previously unions used to be against illegal aliens.
Now they are in favor.
Unions used to be in favor of limiting immigration.
Now they are in favor of unlimited immigration.
Unions used to be vocal in their opposition to foreign countries dumping their imports in the American market place.
Now they are silent.
Unions did not used to advocate for more taxes and goverment spending.
Now they do.
It would be nice for the ruling class to pay people a living wage. However they aren't going to do as long as the following still exists:
They can exploit Third World labor either in the Third World countries
They can import Third Worlders to live 15 to a car, 30 to an house in America.
They don't have to pay tariffs on imports which could have been produced in America.
Unions prefer to engage in left-wing activism rather than serving as a watchdog for working people.

"Premature Deaths of Several FORMER wrestlers" a quote I have not seen documented, but the key word is FORMER, not active. Blake makes several comparisons, here are mine:
Linda was not on the creative side of the business, Franken was.
Linda was on the business side, Franken was not.
Franken had on his side Democrat Dirty Tricks team which turned a 350 vote deficit to a 350 plus vote, a 700 vote change, during recount, with not one vote going to Coleman. Linda does not, she's a Republican.
Franken was an abject failure on Liberal talk radio; Linda is hugely successful handling questions off the cuff.

"Premature Deaths of Several FORMER wrestlers" a quote I have not seen documented, but the key word is FORMER, not active. Blake makes several comparisons, here are mine:
Linda was not on the creative side of the business, Franken was.
Linda was on the business side, Franken was not.
Franken had on his side Democrat Dirty Tricks team which turned a 350 vote deficit to a 350 plus vote, a 700 vote change, during recount, with not one vote going to Coleman. Linda does not, she's a Republican.
Franken was an abject failure on Liberal talk radio; Linda is hugely successful handling questions off the cuff.

Nice blog, It made a good read, You write great articles which made good reading .I will come back and read some more of your blogs, passes the day, I found your blog on yahoo Keep up the excellent work !

ONE of the principal focuses of unions is reasonable wages and compensation. To suggest that increasing the minimum wage to the current paltry sum cited somehow adversely affects the US economy is absurdly nonsensical. Maybe we should consider paying our federal Judges the minimum wage, considering their stupidity. Being a lawyer and having grown up in a family headed by a union business agent, I benefitted by having a father who earned enough money to actually put food on the table. Of course, we also had two gardens, meat from my grandfather, and my father literally did everything including constructing his own room additions, overhauling his own car, hunting, farming part time, etc., etc. Even then, by the time he was 59 he had suffered two heart attacks and was broken down from the hard work. I worked as a union laborer to get through law school. It was hard and dangerous work, building gas pipelines, constructing bridges and roads, cutting timber for roadways and often operating a jack hammer for most of a day. Frankly, compared to the practice of law or sitting on your derriere and lording it over others as a Judge should be paid LESS than such hard work. But, then politics enters the picture, and the wealthy make certain that "sell outs" who meet their profile are appointed, e.g. Richard Posner. I am certain his mother would be very disappointed in him. Unions have had NOTHING to do with our economic calamities, "bubbles", corruption (e.g. Madoff)or any other adverse consequences of the political and banking mismanagement of our economic system. The article provides no factual analysis whatsoever to support any of the foolish hypotheses. How again does a $7.25 minimum wage factor into our current unemployment? Should our citizens be paid $3.00 an hour? Our economy benefits from income parity, and currently it is the extreme variance between the wealthy and middle and lower income classes which has created our problem, very much like the Great Depression.

Now, let us discuss facts. Studies have demonstrated that the formation of unions among workers created greater wage parity, led to critical safety reforms in the workplace and enhanced overall economic performance in the U.S. As unions have declined and we have resorted to economic Darwinism, recession resulted from income disparity and lack of demand in our consumer economy. Where there are no unions or very weak unions, there is a perpetual majority underclass who "enjoy" poverty, poor health and crime, e.g. Mexico. Only those such as the paper shufflers and money changers who contribute nothing to society benefit from the labor of the general population. Go turn on the faucet. Flush the toilet. Turn on the electric lights. Use the elevator. Drive your car down the street. Who did all of this work? Competent, trained and educated union labor. Were they overpaid in comparison to the financial "wizards" on Wall Street and in the banks who tanked our economy? As for G.M., who failed the company? Was it the autoworkers working on the assembly line? Or, was it NON UNION management, designers, engineers, marketers, etc? Having followed the auto industry since I was a child, I can assure you that those who assembled the cars and manufactured the parts had nothing to do with this collapse. VW and Mercedes workers are unionized. They manufacture well designed and engineered cars and have been profitable for decades. G.M. has suffered for years from poor planning at the management level, waste, corruption, poor design and engineering and repeated mis-steps in marketing. All NON UNION. I propose that we immediately reduce the compensation of college professors (grossly overpaid), reform higher education to allow all citizens to obtain knowledge at all levels without traveling to specific geographical locations (college campuses), reduce the salaries of federal judges to minimum wage or even less, and write editorials critical of their general stupidity.

People please remember that trade unions do not honor seniority, the worker still is rewarded for performance. And if it was not for the unions fighting for wages and benefits all of the non union workers wouldn't be enjoying the competitive rates as well. If a union quotes $100... and the non unions cost is 80% is the non union quoting $80? No... they're quoting $99... the difference in cost is being exaggerated.

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